Online auctions are popular methods of buying and selling items. In general, there are two basic ways in which individuals can place a bid on an auction online: Silent Online Auction or Live Online Auction.
Silent Online Auction
One approach is that of the Silent Online Auction: individuals place bids over a period of days or hours up until an established cut-off time, where the highest bidder at the cut-off is the winner. This approach does not necessarily lead to the seller getting the true market value of his offering: a buyer can abstain from bidding until the last possible moment and “snipe” in a bid. Even if there is another buyer who would have bid higher, such other bidder has run out of time. There are over a dozen software products and services available to facilitate auction sniping.
Some Silent Online Auctions have tried to solve this problem with a variable cut-off time, continually extending the cut-off by a few minutes every time a last-moment bid comes in. This has not proved to be a popular solution. It is often frustrating, for both buyer and seller, to wait for an auction to end, since it is always the case that some minutes have to pass with no bidding.
The other way auction sites have tried to solve the sniping problem is by proxy bidding. The site asks buyers to input their maximum bid and allow the site to automatically increment their bid up to that point (“Proxy bid”). Thus, even if one snipes in a bid, the site could still proxy bid for another buyer who had earlier input a higher maximum.
Both of these approaches to combating sniping, proxy bidding and variable cut-off times, incent buyers to bid their “final” offer early on. This reduces the sense of competition, which is important in creating the excitement of the auction experience, a key component that draws people to auction sites in the first place. Furthermore, it is the competition of an auction that leads to the seller getting the true market value of his offering. In live auctions, we know that the “final” offer in a buyer's mind at the start of the auction may go up during the auction depending on the level of competition. This can happen for at least two reasons: the natural instinct to want to win (bidding, after all, is a type of game where there is a winner) and the buyer recognizing that the item has more value than he had originally expected (since the value is determined by market demand, and each bidder only learns the real market demand after its auction begins).
There are several other problems caused by Proxy Bidding. In the Silent Online Auction, it disadvantages the bidder. If every bidder knew for certain the maximum amount he would bid on an item and that maximum would not be affected by his knowledge of the maximum bids of others, then there would be no disadvantage to proxy bidding on Silent Online Auctions. But this is not the case. Competition in an auction can (and often does) change the value of an item in the buyer's mind. If one bidder (X) has information about the bidding intentions of a competitive bidder (Y), but Y knows nothing about the bidding intentions of X, then X is at a strategic advantage relative to Y: X has time and information that can be used to reconsider his maximum bid if need be, while Y does not.
Thus, proxy bidders in a Silent Online Auction disadvantage themselves relative to those who do not bid by proxy but instead wait to bid until minutes or seconds before the close of an auction. This is because, when two competitive proxy bids are placed, often hours, if not days, before the close of an auction, the system, bids the two competitive proxy bidders against each other instantaneously, until one reaches his maximum bid. There is now one currently highest bidder who has indicated to any other would-be competitive bidders that he is willing to bid to at least a certain amount on the item. Those who are watching the auction but who have not placed bids gain a sense of their competition, while the proxy bidder has no idea who else might bid or what they are thinking. The proxy bidder who finds that his maximum is beat out by another bidder with hours or days left in the competition would be foolish to place another proxy bid if he determines he is willing to pay more. By doing so, he will only push up the price of the item, again giving others time to reconsider. In a way, he is bidding against himself. Wise bidders know this, and this is why there is currently so many software options for sniping.
Proxy bidding also makes it much easier for the seller to safely cheat the bidders. If an item receives a proxy bid with two days left in the competition, the seller can get a friend (a “shill”) to place one or a series of higher bids on the item, and, in a matter of minutes, the site will proxy bid for the first buyer and ratchet up the ask price to either the real bidder's maximum or the shill bidder's most-recent bid. Even if the shill ends up with the high bid, there are still two days left in the auction. Other bidders will have time to find the auction and, better yet for the seller, see that there are multiple bidders already, which raises the perceived value of the item.
In another variation on Silent Online Auctions, the bid price starts high and continually goes down until the first person bids, who is then declared the winner. This has also not proved to be popular. It also diminishes competition: no buyer knows anything about his competition since the moment bidding occurs, the auction is over.
Silent Online Auctions have another quality which tends to diminish the sense of competition: the duration of an auction. Typically, Silent Online Auctions take place over the course of days or hours. There is at least one Silent Online Auction where items are available for sale for only one-hour interval. But compared to a Live Auction (online or otherwise) which takes place in a matter of one to five minutes, Silent Online Auctions, from the standpoint of the buyer experience, drag on. Well-trained human auctioneers instill a sense of time pressure in order to increase the sense of competition among bidders. This pressure, which helps lead to the seller getting a higher value for his offering, is nearly absent in Silent Online Auctions, except in the last minute or so when there is a hard cut-off time. It is not surprising to find in many Silent Online Auctions that most of the bidding activity occurs in the last few minutes.
Silent Online Auctions can support a Dutch Auction format. There are at least two variations of Dutch Auctions. The one best known in the United States is the English variation: the seller auctions off multiple items that are identical or at least highly similar in nature (e.g. 100 12-oz. drinking cups, where either all 100 are identical or perhaps 40 are blue and 60 are red). Buyers bid for a certain number of items at a certain price. At the end of the auction (which ends at a set or variable cut-off time), if the total of bids placed seek more items than there are items for sale, then those who have bid the highest prices win, but purchase the item at the bid of the winning bidder who bid the least. In the case of two buyers bidding the same price, the buyer seeking the largest number of items has priority. In a Dutch Online Auction, if one is the lowest winning bidder, but there are not enough items to fully satisfy his order, then such bidder is not bound to purchase. If such bidder declines purchase, the bidder with the next highest priority takes his place. But if there are not enough items to satisfy that bidder's order and that bidder declines, then the process continues. The disadvantage to this approach is that seller (and bidders who have been edged out) may not know the actual results of the auction until after this process has been sorted out.
Today, Dutch Online Auctions take place over a period of time, usually hours or days, not minutes. So, they suffer the same problem of diminishing competition.
The second approach, the Live Online Auction, allows an individual to participate in a live auction being conducted by a human auctioneer in a real-world location, into which an online bidder can signal a desire to bid at a certain price. All bids ultimately are made through and accepted by a human being, an online bid monitor. The human auctioneer may take the bid of someone raising their paddle in the audience, he may take a bid through an online bid monitor, or he may take a bid through a human being who is on the phone with a bidder, a telephone bid taker. If an online bidder bids at a certain ask price sooner, in real time, than a bidder on the auction house floor, because of brief online latencies, the failure of the human online bid monitor or failure of the auctioneer, the bidder from the floor may still win at that ask price. In order to conduct a Live Online Auction, at least three workers must be employed: an auctioneer, an online bid monitor, and a telephone bid taker. If more than one buyer is bidding over the phone, typically one human bid taker is required for each such buyer. It is not unusual to see five or more workers required to conduct an auction.
The relative advantage of an Live Online Auction is that the seller is most likely to get true market value. The auction takes place in a matter of minutes—in real time—continuing only until the auctioneer sees that there are no more bids, at which point the highest bidder wins. This maximizes competition.
Auction sites allow bidders to set up proxy bidding in a Live Online Auction. In a live online auction, those who bid by proxy do not disadvantage themselves as those who proxy bid do in an online silent auction. While the proxy bidder would be strategically advantaged by being present during the auction so that he could make last second reconsiderations of the value of item to him based upon the bidding of others, at least competitive bidders do not know the proxy bidder's intentions ahead of time.
Live Online Auctions cannot support a Dutch Auction format, as a human auctioneer is not able to quickly accept and sort out multiple bids coming in simultaneously from multiple buyers and quickly communicate which bidders have prevailed at a certain ask price before incrementing up to the next ask price. For example, imagine 20 buyers, each bidding for 10 available items, some ordering 6 items, others ordering 4, others ordering 1. After the auctioneer announces an ask price $10 per item, if 8 buyers were to bid at that price, it would require at least a few minutes to determine which buyers had priority. Furthermore, if two bidders both had equal priority but one bid first by a matter of fractions of a second, it would be nearly impossible for the human auctioneer to fairly identify who was the earliest bidder.